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Monday, February 5, 2007

I am putting 10% down on my new apartment. Is that going to cost me more money?

mortgage with keysask_id.gifIt certainly may. There is a particularly important down payment threshold with respect to financing. With a penny less than 20% down, you are in different territory. For many years, less than 20% down meant that the borrower had to pay PMI (private mortgage insurance), in addition to the principal and interest payment on the loan. This PMI is insurance for the lender, but is paid by the borrower and can be hundreds of additional dollars per month. It depends on the loan amount, down payment, and specific loan program. Note that as of January 2007, PMI is tax deductible, subject to some qualifying requirements, as is a portion of your mortgage payment.

A relatively recent innovation is the “piggyback” loan. The lender (or lenders) split the loan into 2 pieces. A first mortgage of 80% of value(or less) with the remaining 10% as a second mortgage or home equity line of credit. Since the 1st mortgage is not above 80% , there is no PMI. An additional benefit is that the payment on the 2nd portion are tax deductible (up to certain limits, consult your tax preparation expert on this).

These piggyback programs are not for everyone, however, and are not without some risk.
The second portion will not be as attractive a program or at the same rate as a first mortgage. The majority of the 2nd loans are offered as home equity lines of credit. As prime rate based instruments, these can present significant rate risk to some borrowers. On the other hand, the structure of these products (interest only for a period of time) can make them an interesting tool for those who can manage them properly. The risks and benefits of these interest only loans , as home equity lines and first mortgages as well, is a another issue worthy of further discussion.

Doug Adler is a senior loan officer with JP Morgan Chase. He has 20 years of experience as a real estate finance professional and can be reached at (212) 789-4052. Doug's a regular contributor to comitini.com.